With an eye on expanding its market share in over-the-counter derivatives, Atlanta-based InterContinental Exchange will acquire YellowJacket Software, an electronic trade negotiation platform that traders use to consolidate quotes and structure complex trades in the weather and energy markets. In light of the huge volumes that occur in the OTC derivatives markets, few observers are surprised by the move.

"Exchanges want to get a piece of the OTC market back," observes TABB Group senior analyst Kevin McPartland, who covers the futures and options exchanges. "The OTC markets have exploded -- they see that they are losing some potential business to the collective OTC markets, and they want to make sure they keep that trading on their exchanges and on their technology." McPartland adds that technology has become an increasingly important competitive differentiator for all exchanges.

In fact, technology has been the basis of the ICE's rapid expansion and acquisition of other exchanges, including the International Petroleum Exchange (IPE), the New York Board of Trade and the Winnepeg Commodities Exchange. The ICE operates three futures exchanges in the U.S., Europe and Canada, and has expanded its trading and clearing activities into a full range of energy, soft commodities, foreign exchange and stock index futures.

Today, ICE provides a single high-speed, electronic platform for trading ICE futures and OTC-cleared products. It offers one architecture that supports futures and one that supports OTC markets, according to an ICE spokeswoman.

With the acquisition of Yellow Jacket, for which financial details were not disclosed, the ICE now has the potential to tap the liquidity from the OTC weather, natural gas, crude and power derivatives that are transacted on Yellow Jacket's network. While "ICE operates a widely distributed electronic trading platform for highly liquid products, Yellow Jacket serves the highly structured instruments and illiquid trades," says the ICE spokeswoman. "Certainly Yellow Jacket occupies a very interesting space in the technology side of the derivative market."

Founded in 2002, Yellow Jacket's core application is YJEnergy, a secure, peer-to-peer communications network used by OTC derivatives traders that rely on public instant messaging networks, such as Yahoo and AOL, to disseminate quotes to one another. "A trader at any given moment may have several instant messages coming in," explains the ICE spokeswoman. "This tool enables them to aggregate information and assemble where market prices are for the trade they want to do." The platform provides the added value of price transparency, the ICE spokeswoman notes.

Currently, 130 clients use the YJEnergy product, including big hedge funds, banks, utilities and power companies. The ICE, however, is looking at how it can leverage the technology beyond energy and weather derivatives. "We see this not just as an energy or commodities tool, but it could potentially apply to complex asset-class trades, such as fixed income instruments negotiated OTC," says the ICE spokeswoman, who adds that Yellow Jacket will be a wholly owned subsidiary of ICE.

One of the potential synergies between the ICE and Yellow Jacket is clearing. According to the ICE spokeswoman, Yellow Jacket currently submits OTC trades for clearing to several exchanges. "We're integrating that ... [into] ICE's cleared products," she says.

Liffe, SuperDerivatives Connect

But the ICE isn't the only exchange that is venturing into technology deals to penetrate the OTC derivatives space. On Feb. 26, Liffe, the London-based futures exchange owned by NYSE Euronext, partnered with SuperDerivatives to give users of the derivatives pricing and analysis platform direct access to the Liffe Connect electronic trading platform. "The partnership was driven by market demand from market makers and from buy-side investors who are looking for the right market to realize their investment goals," says Ed Crouch, global head of corporate and strategic development for SuperDerivatives.

Banks, brokers, asset managers and mutual funds use the SuperDerivatives products to price OTC derivatives. Now, market participants can access Liffe's direct execution capabilities and market data, while combining that with the analytical and productivity functionality that SuperDerivatives brings to the table with its platforms, says Crouch.

"There are certain structures that can be traded on the exchange, and that's the right venue, and there are other structures that can't because they are OTC structures," explains Crouch. "This gives [customers] a single platform so that people can choose what the best execution venue is for whatever it is they are trading at the moment." For example, if a trader were executing a back-to-back trade, for which he had an exchange-traded product on one side and an OTC product on the other side, he could execute both on the Liffe/SuperDerivatives platform, Crouch adds.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio